Legacy Reserves makes deals

Published 7:00 pm, Saturday, July 11, 2015

Midland’s Legacy Reserves spent a busy week making deals that stretched from Lea County, New Mexico, and Howard, Reagan and Crockett counties across to East Texas.

In one deal, Legacy has entered into an agreement with funds managed by TPG Special Situations Partners to fund horizontal development of certain of Legacy’s Spraberry, Wolfcamp and Bone Spring rights in the Permian Basin, about 6,000 net acres in Howard, Reagan, and Crockett counties, Texas and Lea County, New Mexico, on which Legacy estimates there are over 150 horizontal locations requiring over $700 million of capital deployment net to the Legacy and TSSP interests.

In the second, Legacy announced it has entered into separate agreements with affiliates of Anadarko Petroleum and Western Gas Partners LP to purchase natural gas properties and gathering and processing assets in East Texas for a combined $440 million. These properties represent Legacy’s entry into a new basin in East Texas and into meaningful gathering and processing operations supporting the natural gas properties.

Legacy’s agreement with TGP Special Situations Partners calls for the company to give TSSP an undivided 87.5 percent of Legacy’s working interest in the covered oil and gas properties subject to re-assignment, reversion and other adjustments. Legacy and TSSP will establish tranches of proposed horizontal locations, with TSSP funding 95 percent of Legacy's drilling and completion costs and receiving 87.5 percent of certain of Legacy’s interests in any wells in such tranche until it achieves a 1.0x return on investment. Legacy will fund 5% of the drilling and completion costs and retain 12.5 percent of certain of its interests prior to the ROI Hurdle.

TSSP has initially committed $150 million to fund the first tranche, which, based on Legacy’s anticipated two to three rig drilling program, will take about one year. Additionally, TSSP has the right to participate in any future identified horizontal development opportunities in the Delaware and Midland Basins under the same economic terms.

When the East Texas acquisitions close, expected in the third quarter, Legacy will acquire estimated proved reserves of about 420 Bcfe of which 100 percent are natural gas, 95 percent are classified as proved developed producing, and 95 percent are operated; estimated third quarter production of about 70 Mmcfe/d, yielding a proved reserves-to-production ratio of 16.4 years; a multi-year development plan centered on recompletions and workovers to further flatten production declines and extend the productive life of the fields, significant additional drilling inventory in a higher gas price environment and 567 miles of high-pressure pipeline and low-pressure gathering lines and a 502 Mmcfe/d processing plant with access to five major gas markets.

Dan Westcott, Legacy’s executive vice president and chief financial officer, took a few minutes to answer some in-depth questions and put the deals in perspective.

Q. Why monetize and develop these horizontal assets now?

A. A combination of the reduction in drilling costs, better availability of equipment and services, increased interest from private equity, and the fit within our MLP business model. Additionally, the nature of our asset profile is scattered and selling the acreage outright proved to be more difficult, given that it wasn’t a particularly blocky footprint. This transaction structure represents the highest valuation approach for our assets.

Q. They’re paying 95 percent of the costs and receiving 87.5 percent of the working interest until it achieves its return on investment. That’s a large chunk of working interest to turn over.

A. Right, but if you look at the entire deal, it works out better for us. We maintain operatorship. Remember too, we are an MLP, so stable production and minimal capital outlay is very important for the health of our business. This model allows us to put minimal dollars to work while receiving a greater amount of the production and cash flow. Also, with the reversions that are set up, we end up receiving more than 12.5 percent of the working interest over the life. In our investor presentation on the deal, we highlighted that for 5 percent of the capital, we actually receive around 60 percent of the reserves in the program.

Q. Your deals with Anadarko and Western Gas Partners in East Texas puts you in a new producing basin. What do you find attractive about that area?

A. It’s an established, mature field with low decline rates that really fit the MLP well. Also, the area is ripe for consolidation and we feel that we will be able to make some good bolt-on acquisitions to grow our position in East Texas. We’ve been trying for a while to get a position in that part of the country, and finally were able to do so with a gas-weighted transaction.

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Q. What do these moves say about Legacy’s confidence in the future of the U.S. oil and gas industry?

A. We’re obviously confident in the long-term strength of the industry. Additionally, we feel that the MLP structure is necessary for the overall life-cycle of the oil and gas industry, where the public and private c-corps will drill the majority of the high-rate (and high-decline) wells, and sell off the low-decline, stable production in order to secure capital for future development. Legacy, as an MLP, will be the natural buyer for a lot of those properties.